Search for a media stock strategy

DavidB. Wilkerson

SAN FRANCISCO (CBS.MW) - Media investors are making it quite clear that they expect a quick conclusion to the conflict in Iraq.

Are they being premature?

On the heels of a week of solid gains in the general market - its longest sustain advance in two years - media stocks soared Thursday, with good moves across several sub-sectors, among them diversified entertainment, newspaper publishers, and even radio, which would appear to some to be a shaky bet given the short-term buying patterns of radio advertisers. See full story.

The buying continued even after Viacom's
VIAVIA, +1.40%
CBS unit switched its NCAA "March Madness" basketball games to Walt Disney's ESPN for the afternoon while it concentrated on continuous war coverage.

Viacom rose $1.99 to $40.74, a gain of 5 percent, on news that Chief Operating Officer Mel Karmazin has agreed to stay at the company through 2006. His re-signing ends more than a year of speculation that friction between Karmazin and Chairman Sumner Redstone would lead to Karmazin's departure at the end of this year. See full story.

But Viacom is one of two major entertainment stocks that are particularly vulnerable until it is known precisely how long the war will last, says Dennis McAlpine, president of McAlpine Associates.

"They have the largest revenue coming from advertising, close to 50 percent," he points out.

The other company McAlpine is wary of in the near term due to war concerns is Disney
DIS, +1.28%
"Because they get it not only from advertising, but even more so on the travel impact," he said. "Because they had started to regain some of the attendance they had lost, particularly in Florida. And as you listen to the reports from United and others, air travel has disappeared."

Disney last month imposed a hiring freeze at its Florida theme parks due to uncertainty over future business and the possible effects of a war with Iraq. The company said its theme parks are getting advance bookings on an average of 15 to 30 days, which is below the norm of 60 to 90 days.

Ralph Russell, president of Russell Financial Management, likes Viacom over a six-to-nine-month horizon, presuming that the war is wrapped up quickly - perhaps this month. "They've got so many outlets, between CBS, the cable channels, Infinity [radio group] -- they could be a big beneficiary" of a turnaround in advertising over the second half of the year, Russell said. He also likes News Corp.
NWS, -0.90%
for similar reasons.

Russell sees industry-wide ad revenue generally rising by "low single-digit" to "double-digit" percentages this year, compared to 2002. "My take on this is that many business decisions have been delayed until maybe there's more clarity in the world....[and] at least one catalyst that leads to some clarity is upon us," he said, referring to the war.

As for cable stocks, which have traditionally been seen as a hedge against advertising-related volatility because so much of their revenue comes from subscriptions -- conventional wisdom is being challenged.

"They have leveraged themselves [so much] that they need to get that advertising money," said McAlpine. Cable stocks plunged 60 to 90 percent in 2002, even companies with more solid balance sheets, like Cox Communications and Comcast (before its acquisition of AT&T Broadband).

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